On the go and no time to finish that story right now? Your News is the place for you to save content to read later from any device. Register with us and content you save will appear here so you can access them to read later.

New Zealand's rapidly rising house prices are cranking up the economic risks for the financial institutions operating in the country, S&P Global Ratings said in a report.

S&P said that if a sharp correction in property prices were to occur, the impact on financial institutions would be amplified by New Zealand's external weaknesses -- its persistent current account deficits and high levels of external debt.

Residential property prices nationally have increased in excess of 10 per cent in the past year.

Following strong growth during 2011-2013, house price growth abated in 2014.

"And while some indicators of financial stability have improved since the RBNZ embarked on macroprudential intervention in 2013, their effect has been narrow as housing-related imbalances continue to build, highlighting the challenge facing the regulator as numerous cyclical and structural impediments, most outside of its control, remain unaddressed," the report said.

"We believe a stabilisation in economic imbalances will help to avert the possibility of further negative rating actions on New Zealand's financial institutions," it said.

S&P said a significant widening of the current account deficit to about 4.3 per cent of GDP in fiscal 2017 from its cyclical low of about 2.4 per cent of GDP in 2014 would heighten the risk of a sudden shift in foreign investors' willingness to fund New Zealand's external borrowing.

"In such a scenario, the cost of external borrowings would rise, domestic credit conditions would tighten, the currency may depreciate sharply, and economic growth would slow markedly," it said.

"These would ultimately result in lower income levels and a potential plunge in house prices.

But S&P said a burst in the asset price bubble appeared unlikely.

"Our base-case expectation remains that the heightened economic imbalances in New Zealand will unwind in an orderly manner - without a material rise in credit losses for the lending institutions," it said.

"This has generally been the case over past property cycles, and the New Zealand economic outlook remains relatively benign by global standards.

"However, other things being equal, a rapid rise in asset prices would signal a higher risk of a sharp unwinding--particularly if the rises were accompanied by strong growth in debt funding for such assets," it said.

S&P said that in a scenario of rapidly falling house prices, almost all New Zealand financial institutions would be exposed to a drop in operating earnings and a significant rise in credit losses.

"A sharp decline in house prices in any country is generally accompanied by a weakening of other key macroeconomic factors, such as unemployment, household expenditure, corporate investments, and total economic activity," it said.

"In New Zealand's case, its external weaknesses could amplify the impact."